The reduction of product cost as a method of increasing the ability to compete on the international market
________________________________________________________________________________
(Thesis Title
Master Thesis
Supervisor I
______________
(position, name)
Supervisor II___________
(position, name)
St.Petersburg
2009
Summary
1. Introduction.......................................................................................... 3
2. Theoretical part........................................................................................ 5
2.1. The concept of product cost..................................................................... 5
2.2. The expenses contributing to the product costs............................................. 6
2.3The expenses related to the operating of the harvester machinery.......................... 8
2.4. Techniques and ways of reducing costs...................................................... 15
2.5. Why is it necessary to reduce the expenses of a business............................. 18
2.6. The businesses' ability to compete on the international markets..................... 19
2.7. The reduction of expenses in the period of crisis.......................................... 20
2.8. Profitability of production: concept, types, definition, methods of calculation......... 21
2.9. Prime risk factors related to the business activity of the company...................... 2
3. Practical part............................................................................... 28
3.1. The description of the company and its achievements.................................... 28
3.2. The analysis of the current situation of the company.................................... 33
3.3. The competitive position of the company................................................... 34
3.4. The analysis of cost reduction and recommendations...................................... 35
4. Conclusion........................................................................................... 48
5. Bibliography ........................................................................................ 49
Intro
A large number of the companies of the forest industry, including those, who are specializing in timber processing, its secondary products, and delivery, are fighting for survival in the current conditions of worldwide economic downturn.
Effective July 1, 2007 Russia has raised the dues on export of round timber 2.5 times - from 4 to 10 euros per cubic meter (20% of the customs value), from April 1, 2008 - to 15 euros per cubic meter, and by 2009 the dues are forecasted to increase to 80% of the customs value, but no less than 50 euros per cubic meter.
Without a doubt, to maintain the ability to compete in the conditions of the declining demand, the companies of the wood export industry need to go through significant changes. How would the companies of the industry be able to realize this reorganization - based on the long overdue consolidation of assets (especially in Europe), the changes in the business model, or the combination of the both approaches - this question remains open.
The aim of the research: The reduction of the production costs as a method of increasing the ability to compete on the international market.
The actuality of the research consists of the fact that export of timber to Finland is no longer profitable for the wood processing companies, and to maintain their competitive ability they must not only reduce their costs, including shipping, logistics and customs, but also expand the distribution area and the product mix directed towards domestic as well as the international market.
Therefore, the topic of research is not only relevant, but also has the practical application.
The goals and objectives: The goal of the diploma research is to provide recommendations regarding the reduction of production costs of the analyzed company and give suggestions on how to maintain the ability to compete on the international and domestic markets.
The goal of the research will be reached through performing the following tasks:
1. To review the theoretical aspects of the reduction of the product costs and gaining the competitive advantage;
2. To analyze the current state of business of the analyzed firm;
3. To analyze the current expenses, product costs and area of distribution;
4. To analyze the operating costs of the harvesting machinery; ;
5. To analyze the risks related to the business activity of the company
6. To provide recommendations regarding the expansion of the distribution area;
According to the tasks, the diploma research consists of introduction, theoretical part, practical part, conclusions, and the list of the used publications.
The theoretical and methodological foundation of this diploma research is based on the research done by the Russian and international scientists on product valuation and improvement of marketability.
2. Teoretical part
2.1. The concept of product cost.
The product costs are the monetary expenses of the enterprise related to the production and sales of goods. They consist of the expenses incurred in relation to the production process (of goods or services), the cost of economic resources (natural, raw materials, labor). There are several types of product costs:
• shop costs;
• production costs;
• overall costs.
Shop costs are all expenses related to the production of goods in a certain shop or a production floor.
Production costs are all expenses related to the production of goods in a certain factory, from the first job of the production process until the delivery of the finished goods to the warehouse, i.e. they include not only the shop costs, but also the overhead costs.
The overall costs are all expenses related to the production and sales of goods. They consist of production costs and non-production expenses (costs of packaging, delivery and other expenses).
There are also individual and industry average costs.
Industry average costs are calculated as a weighted average and define the average costs per production unit of the industry, therefore they reflect the necessary expenses more accurately.
There are two complementary systems of classification that are used to analyze the variety of expenses comprising the cost of goods:
• itemized;
• cost center.
Expenses of the same economic nature are called economic items regardless of the way, in which they are incurred.
Individual costs are defined by the specific conditions of operations of an enterprise.
2.2. Expenses that make up product costs.
Classification of expenses into the item groups (creating a budget of production costs).
All expenses, that make up product costs, are classified according to their economic nature into the following item groups:
1. raw materials expenses ( deducting the recycled waste);
2. payroll expenses;
3. social security deductions;
4. amortization of fixed principal funds;
5. other expenses.
Item group «raw materials expenses» reflects the cost of purchased items for the needs of production, such as raw materials, parts, semi-finished products, fuel and energy of all kinds, used for the production needs as well as for the general operations (heating, shipment of goods, etc.). Excluded is the value of the recycled waste, such as leftover materials, fuel, etc, that have been created during the production process and have lost, partially or entirely, their original properties, and which are not used according to their main purpose, or the use of which requires additional spending.
Item group «payroll expenses» includes expenses related to the wage payments to the full time employees, including bonuses based on the production results, incentives and compensations, as well as payments for services of outside personnel employed at the main production.
Item group «social security deductions» reflects mandatory deductions to the social security, Pension fund, Government fund of employment, and medical insurance. The deductions are calculated as a percentage of employee's wages.
Item group «amortization of principal funds» includes the amount of amortization deductions for the complete recovery of the principal production funds. It is calculated based on the balance sheet values and according to the standard guidelines, including the accelerated amortization of the most actively used part.
All other expenses not mentioned above are reflected in the item group «other expenses». They include taxes, fees, deductions to the special funds, loan payments, travel expenses, communication expenses, etc.
Classification of expenses into the item groups is used for budgeting purposes, and also as a financial justification for the investments.
Classification of expenses by the cost items. Definition of product costs.
To find out the opportunities of lowering the product costs it is important to know not only the total amount of expenses that an enterprise incurs in each item group, but also the volume of expenses depending on the manner in which they are incurred Classification per cost item provides such an opportunity, and it could include the following items:
1. Raw materials.
2. Recycled waste (deducted).
3. Ready to use items, semi finished goods and outsourced production services provided by other enterprises and organizations.
4. Fuel and energy required for the production needs - the cost of energy (fuel, electricity, vapor, water, etc.), used exclusively for the production of goods. Purchased energy is valued based on the standard rates, generated in-house is valued according to the shop costs.
5. Wages of the employees of the production plant - this category includes only the wages (base wages and extras) of the production plant workers (i.e. employed at the main line of production).
6. Social security deductions - deducted from the wages of the production workers, according to the government standards.
7. Production research and development expenses - expenses of preliminary works;expences incurred while developing new production lines (research costs); expenses related to the implementation of new production lines (startup costs); increased costs of the production of new goods during the implementation phase; expenses related to research and development of new product types that are not intended for the industrial or serial production. .
8. Overhead production costs.
9. Overhead administrative costs.
10. Losses due to rejected goods.
11. Other production costs.
12. Other business costs..
The total of first 8 categories makes up shop costs, the total of categories from 1 to 11 makes up production costs, and the grand total of all 12 categories makes up total cost of production.
2.3. Expenses related to the operating of the harvester machinery.
Wood harvester machinery usage forecasts are based on the calculations of the operating costs. This method allows to compare the efficiency of using various harvesting systems and equipment.
The information about the nature of expenses is helpful in pointing out the factors that contribute to the increase of profitability.
There are fixed and variable operating expenses related to the wood harvester machinery.
Fixed costs are calculated for a certain time period, usually, for a calendar year, and do not change in proportion to the amount of time the machinery is used.
Variable costs are measured in proportion to the amount of time the machinery is used.
Fixed costs include: interest on the capital and amortization, all types of insurance, administrative and overhead costs, and compensation paid to the machine operator.
Compensation includes all expenses, related to operator's travel from his residence to the cutting area, and the amount of travel expenses stipulated in the operator's contract.
Direct costs include labor expenses, fuel and oil expenses, maintenance and repair expenses of the timber cutting vehicle.
Cumulative expenses, in 1000 rub
Working time during the year
Ex.1. Fixed costs do not depend on the labor time during the year.
Cumulative expenses increase as the variables are growing.
Hourly costs, rub/hr
Working time during the year
Ex.2. The share of fixed costs is decreasing during the year, measured in hourly costs.
The control over effectiveness of lumber machinery operation supposes the division of total time into parts (ex.3.)
Ex 3. The allocation of total time.
Total time - total time span for the calculation period.
Working time - total time span related to the job; in theory, the time the operator spends at his place of work..
Downtime - all other time that cannot be considered working time. For example, lunch break is not considered working time..
Production time - time spent performing the main job at a particular cutting area..
Travel time - time spent on relocation of the harvester from one cutting area to another. .
Repair time - the length of complex maintenance and repair works on the machinery that cannot be performed at the cutting area.
Operating time - time directly or indirectly related to the performing the job, including less than 15-minute breaks.
Interruptions are breaks that last more than 15 minutes, during which the main tasks are not performed. They include the preliminary or final works, personal breaks, meetings, time spent on maintenance and small repairs.
Actual time - is the operating time less the breaks that are less than 15 minutes.
The characteristics, such as operation of machinery under various conditions, or the dimensions that characterize the efficiency of operating of various types of machinery can be compared using the following correlation. Technical level of usage is usually employed.

Technical level of usage = Operating time / (Repair time + Time for machinery stops) where the «time for machinery stops» means the time spent on miscellaneous repairs, servicing the harvester machinery, which cause the forced interruptions.
The main goal of the calculation is to define the costs of the operating the machinery and to express them as a function of time and productivity. The goal is to obtain the reliable data of the costs:
- rub/year;
- rub/hour;
- rub/m3 .
Therefore, it is possible to define the costs of operations in various conditions and calculate a usage level and the applicable costs, so that the job would be profitable. The method of calculation of such costs depends on its further use.
When the costs are calculated for one piece of machinery, they are based on the price and information about the expenses of that particular piece of machinery. The information is provided by the accounting system and the actual performance results.
To justify the expenses, the average information about the machinery is used, such as purchase price, consumption of fuel and oil, information about planned maintenance. The results about actual time of performance can be calculated using the standard procedures and data about performance observations. When comparing various technologies the calculations should be done in the similar units.
Principles of calculation of standard time.
It is important that the calculations include a unit of time, on which further marks could be based, such as production output per unit of time, and others. One machine hour is generally considered a standard time unit.
Working time. The amount of yearly working time is calculated by multiplying a number of hours per shift by the number of labor hours per year.
An example of calculation of yearly working time in Russia assuming a single-shift schedule: 8 (hours per day) x 22,4 (average number of labor days per month) x 12 (months) = 2 150,4 hours.
In case if the machinery is operated during the double shifts, the working time varies depending on the daily maintenance schedule. If it is done by one operator, then the duration of the working time is 16 hours. If the maintenance is performed by two operators, 30 min each, then the working time of the machine is 15,5 hours.
Therefore, the yearly working time is:
16,0 (hrs/day) х 22,4 (days/month) х 12 (months) = 4 300,8 working hours/year, or
15,5 (hrs/day) х 22,4 (days/month) х 12 (months) = 4 166,4 working hours/year.
The economically justified working schedule of the harvester "Тimberjack 1270" is the following:
Single shift - 8 months/calendar year,
Double shift - 4 months/calendar year.
Then the total working time during the year will be 2 867 hours (Annex, table 3 ).
Travel time. The share of travel time is, on average, 5 % for the forwarders and 3-5 % for the harvesters, from the actual working time.
The degree of usage. The type or brand of the lumber machinery does not significantly affect the degree of usage, which is :
80-90% for the forwarder
75-85 % for the harvester
Hourly working time - is the time for which the operator is paid according to the hourly pay schedule for performing maintenance, repairs, and preliminary and final works.
The useful life of the machinery (in years) depends on the length of time the machine is used , and also on the degree of the wear and tear, and is 7-8 years for the forwarder and 6-7 years for the harvester. The definition of «write off» means a yearly reduction of the value of the machinery. For example, according to the forecast, the machinery should be operated during 7 years. The residual book value - the price the machinery could be sold for after seven years - is calculated. If the machinery has been completely worn out, then the end book value will be zero.
The yearly write off is calculated as: (Purchase price - Residual book value) / Term of operation, years
The residual book value is the price the machinery could be sold for after a certain term of operation.
The price of the machinery The definition of «purchase price» is used in calculations. The purchase price includes the cost incurred upon purchasing the car, the cost of additional parts, transportation expenses and customs fees.
Fixed costs.
The interest rate depends on the structure of the capital. The interest rate on the borrowed funds should correspond to the market interest rate. The interest rate on the owner's capital is set according to the alternative investments.
To calculate the interest rate the following formula is suggested:
, where (1)
с - yearly interest, in rub
П - yearly percentage rate
Ц - price of the machinery
О - remaining book value.
Insurance. Lumber machinery is usually insured against fires, accidents and liability for damages. The yearly insurance expenses are calculated using the actual insurance rates.
If the personal means of transport are used for the needs of the production, the expenses, related to the travel and repairs, are compensated. The mileage is defined as an average length of the largest trips made during the year. The compensation rate for the transportation expenses is stipulated in the contract.
The compensation of the transportation expenses- is a refund of personal funds spent by the operator on the commute to the place of work. The number of kilometers is calculated based on the data of the previous years. The rate per kilometer is stipulated in the contract.
General expenses include the expenses of maintaining the company, such as accounting department. Average yearly amount is used in the calculations.
Variable costs
Payroll costs. Volume-based and hourly labor compensation, overtime rates and extra payments for working in the severe conditions are stipulated based on the group labor contract. Indirect payroll costs, such as social security deductions, are defined according to the corresponding agreement and regulations.
Fuel and oil expenses. The total amount of fuel, oil and lubricants is defined according to their usage per a unit of time.
Maintenance and repair expenses are calculated for the entire economic life of the machinery based on the average yearly values. The cost of necessary spare parts and payments for the outsourced repair and maintenance services are also included in this category.
Payment for the time spent by the operator on repairs and maintenance is included in the payroll expenses. The actual yearly expenses for repairs and maintenance can be defined only by analyzing those of the previous periods. In preliminary calculations, maintenance and repair expenses are estimated based on the current data. These expenses should be accounted for on the continuous basis. This information is useful when planning a schedule replacement of the machinery. It is recommended to include a 5% markup for the entrepreneurial risk in a form of a reserve fund.
Yearly expenses
Yearly expenses are calculated by adding all the costs incurred during the year. The hourly expenses are calculated by dividing the yearly expenses by the number of actual hours.
The cost of the production unit.
The calculation of production unit cost of the lumber machinery is calculated: for the forwarder - per number of transported cubic meters of lumber, for the harvester - per number of cut cubic meters of lumber. The expenses per one cubic meter are calculated by dividing of the hourly expenses by the hourly output.
Conclusion:
The costs of lumber cutting are influenced by various factors. For example, the productivity, particularly of a harvester, has a significant influence on the production cost unit (rub/m3). Thus, at the intermediate thinning the productivity could be less than 5 m3/hr , while at the principal felling under favorable conditions, it could increase up to 20 m3/hr or more.
The calculation of the useful life of the machinery and degrees of its usage should be as accurate as possible, as they directly affect the fixed costs.
2.4. Methods and ways of reducing costs.
One of the main factors that defines economical and financial situation of the enterprises of the lumber industry is the uncontrolled increase in cost of production, and, as a result, a low competitive ability of the produced goods. Without a doubt, the increase of costs is related with the impact of the external factors:
• The increase of prices and rates of products and services of the natural monopolies;
• Malfunctions of the regulatory product export system;
• Continuous inflation;
• Increase in taxes;
• Revaluation on main funds;
• Increase in wages, etc.
Significant influence is provided by the internal factors, in particular:
• The decrease of the production volume;
• The decrease of the wood quality;
• The decrease in productivity;
• The increase in capitalization ratio
The structure of the expenses of enterprise should be analyzed per each item, as well as per each item group. This is a necessary measure of managing costs of the enterprise with a goal of minimizing them.
The factors that reduce the product costs are the causes that impact a certain level of expenses. They are usually divided into the macroeconomic factors, industry factors and company-specific factors.
The macroeconomic factors - are the changes in prices of raw materials installations, electricity rates, compensation rates of the labor force.
Industry factors reflect the improvements in the supply of the materials, increase in the level of concentration and the size of the production, specialization, improvements in the management structure, cooperation development.
Company-specific factors reflect the development of larger constructions, economy of the material resources, improved use of machinery, mechanisms, equipment , etc.
The following can be pointed out as a possible areas of lowering the product costs: raw materials, labor expenses, maintenance and repair expenses, overhead costs, the increase of labor productivity.
The value of sources and factors, that allow to lower the product costs, permits to generate a planned level of product costs.
Currently, the following economic factors are considered when performing the analysis of the actual product cost of the goods, searching for the opportunities and economic effects of lowering the product costs. The savings, leading to the actual reduction of product costs, are calculated according to the following factors:
1. The increase of technological level of the production. This includes implementation of new and progressive technologies, mechanization and automatization of the production processes, improvements of use and introduction of new types of raw materials, changes in the design and technical characteristics of the goods; other factors that improve the technical level of the production.
2. The improvements in labor and process management The reduction of costs can occur as a result of changes in the production processes, types and methods of required labor due to the specialization of the production; improvements in the production management and the reduction of the costs of doing so; the improvements of use of the main funds, the improvements in the materials supply; the reduction of transportation expenses; and due to the other factors that increase the organization level of the production.
3. The changes of the volume and structure of the goods that could lead to the relative decrease of fixed costs (except amortization), relative decrease of the amortization deductions, changes of the product range, increase of its quality. The fixed costs are not directly related to the quality of the produced goods. As the volume of production increases the amount of fixed costs per production unit decreases, which leads to the decrease of the product costs.
4. The improvements in the use of natural resources. This includes the changes of the structure and the quality of the raw materials, changes in the yield of the fields, methods of the extraction of the raw materials, changes in other natural factors. These factors reflect the impact of the environmental conditions on the amount of variable costs. The analysis of the impact of these factors is done based on the techniques of the extractive industry.
5. The industry and other factors. This includes the implementation and development of new production floors, production unit and production lines, planning and development of the production at the current capacities of the enterprise; and other factors. It is necessary to analyze the opportunities of reducing the product costs due to the liquidation of the obsolete production floors and implementation of the new ones, based on the modern technology with better economic indications.
Significant opportunities of lowering the costs consist of the planning and development of new production types and new technological processes, and of the reduction of startup costs of the putting in the operation of the existing product floors and objects.
If the changes in costs incurred during the analyzed period do not pertain to any of the above factors, they fall into "other" category. This includes, for example, the changes of the amounts or termination of various mandatory payments, changes of the amount of costs included in the product cost, etc.
Factors that influence the reduction of product costs must be cumulatively reviewed in the conclusion of the analysis, it is necessary to point out the cumulative impact of the factors on the overall reduction of the cost of the production unit. .
The throughout analysis of expenses allows to find the additional factors that lead to the reduction of the production costs. The following integrated costs are also parts of the product costs: the administrative and managerial costs, expenses of planning and development of the new production types, losses due to the rejects; other production expenses; non-production expenses.
Conclusion
The opportunities of lowering the product costs are provided by the factors that influence the reduction of the expenses of the production, such as
1. the reduction of the costs of the raw materials, fuel and energy.
2. the reduction of the amortizaional expenses
3. the reduction of labor expenses
4. the reduction of managerial expenses
5. the development of the new distribution channels and production of the less expensive materials (wood chips, split wood).
Factors that reduce the product costs:
1. Internal factors - factors of technical and economic nature within the control of the enterprise (the increase of the technological level of the production, the improvements in the organizational and labor processes, changes in the volume of the production)
2.External factors - factors beyond the immediate control of the enterprise (raw material prices, tax rates, government deductions)
2.5. Why it is necessary to reduce the expenses of the enterprise.
It is an obvious fact, that in order to increase the profitability and cash flow of the company, and to reduce the product cost, it is necessary to reduce the expenses.
As a rule, the expenses increase in proportion to the growth of the business. If until 2007 the yearly growth rate of the lumber industry and exports was on average 8%, the enterprises were focused on reduction of the miscellaneous expenses that make up less than 1% of the product costs. In the current conditions of economic crisis, decreased demand of the lumber industry products and the reduction of the rough wood exports in 2008, the companies must single out the expenses that make up a large share of the product costs and pay the most attention to those costs.
In my opinion, the enterprise should conduct meetings with the existing customers, find alternative suppliers and negotiate, find another company in the same industry and purchase materials jointly, thus getting a larger volume discount.
The company should also optimize the transport expenses, energy expenses, improve the quality of wood processing by employing the new technologies, focus on producing cheaper goods (wood chips, split wood), develop a system of minimizing the labor expenses, conduct personnel training.
2.6. The ability to compete on the international market.
In my opinion, the competitive advantage of the company on the international market is defined by the four conditions:
1. Component conditions, or those specific factors (for example, qualified labor force or infrastructure) that are required for the successful competition in this industry.
2. Demand conditions, meaning the volume on demand on the domestic market for the products or services provided by the industry.
3. Similar and complementary industries, i.e. the presence or the absence in the country of similar and complementary industries, capable of competing on the international market.
4. The strategy of the company, its structure and competition, the conditions of the country that define the process of creation and management of the companies, and the nature of competition on the domestic market.

There are two additional variables that have a significant impact on the situation in the country:
• random events, or those that are beyond the control of the management of the company;
• national policy

Conclusion:
In this research we will analyze a company that has experienced a dramatic decrease of its ability to compete on the international market due to the government policy and overall global decrease of demand on the products of forest industry.
2.7. The reduction of expenses in the conditions of the economic crisis.
Has the forest industry been affected by the crisis? The enterprises of the forest industry has began to feel the impact of the crisis in June of this year. In spring there has been noted the shortage of credit, the decrease of exports and the decline in construction - of the major consumer of the lumber products. Before the crisis the forest industry has experienced the period of expansion, during which the impact of managerial errors was insignificant due to the aggressive growth of exports, wood processing, construction and other demands. The increases of cost were leading to higher prices, which the market was able to absorb. As soon as the construction industry went into stagnation, the wood processing industry has experienced a sharp downfall.
Moreover, in my opinion, the biggest hit was taken by the exporters due to the decline of prices and demand in Europe.
As far as the domestic market, the decrease of the demand will not be particularly significant, because the general population has the purchasing power. The domestic market appears to be promising, because it is closely involved with the housing shortage, consumer savings, and also with the increase of customs dues, and the fact, that foreign enterprises will consider the investments in the forest industry of Russia to be profitable.
2.8. The profitability of production: concept, types, definition, methods of calculation
To find out how effective is the enterprise, the results (gross income, profits) are compared to the incurred costs or used resources. Profitability (or the operating ratio) is the comparison of profits to the costs.
The operating ratio of the company:
, where (2)
V - volume of production;
Ц- the price of the production unit;
с/с - the product cost of the production unit;
Фо - the cost of main capital used for production;
Ф н.об - the cost of standard working assets;
The operating ratio index is closely related to the profitability index (cost effectiveness of the production is the profitability of the production), however, unlike the latter, it is relative, it allows to estimate the effectiveness of use of the economic resources.
The economic nature of the profitability consists of the fact that it shows the amount of profits per each ruble of expenses. There is profitability of the goods and profitability of the production..
Profitability of the production - is the profit generated from one ruble of the capital used for the production.
(3)
where Побщ. - total profit (Per balance sheet).
Profitability of the product - is the profit generated from one ruble of current expenses.
(4)
Where Пр - the profit from product sales.
There are several types of profitability factors that are calculated by the enterprises
1. Profitability of the products could be calculated per total output of goods or per its various types. In first cast it is defined as a ratio of profit from sales of the products to the expenses related to production and sales. The profitability of total products is calculated as a ratio of profits from the product sales to the income from the product sales; and, as a ratio of balance sheet profits to the income from the product sales; and, as a ratio of net profits to the income from the product sales.
The ratios of profitability of total products provide an insight about the effectiveness of the current expenses of the enterprise and profitability of the sold goods.
In the second case, the profitability of various product types is calculated. It depends on the sales price and the product cost.
1. The return on the production funds is calculated as a ratio of balance sheet profits to yearly average cost of the main capital used for the production and working capital. This ratio can be also calculated using the net profit value.
2. The return on the investments in the enterprise is related to the value of assets at its disposal. Values of balance sheet and net profits are used in the calculation. The value of assets is defined according to the accounting data. Besides profits, the income from product sales can also be used for the calculation. This ratio shows the amount of sales generated per 1 ruble of the invested funds. .
The return on the own funds of the enterprise is calculated by the ratio of net profits to the own funds, defined according to the accounting data.
It is also advisable to calculate the return on long term financial investments. The return on the long term financial investments is calculated as а ratio of income from the securities and shares of other enterprises the total value of the financial investments. The result can be compared with the profitability of the production funds. In some cases it could be higher than the profitability of the production funds.
The changes in the profitability ratios should be looked into, analyzing the reasons being the changes. .
Table 1. Profitability ratios
Name Calculation formula Notes
1.Return on sales (5)
It means either the increase of prices while the expenses are constant, or the decrease of the expenses while the prices remain fixed. The decrease of prices, increase of product costs shows the declining demand on the enterprises' products.
2.Return on assets (6)
Reflects the effectiveness of us of the entire investment capital. The lower level, compared to the other enterprises, indicates reinvestment of capital or low demand.
3. the return on the main capital. (7)
The high value of the ratio reflects the effective use of the main capital of the enterprise. It is analyzed together with the return on assets ratio. If the return on the main capital is increasing and the return on assets is decreasing then additional research of the working capital structure is required.
4.the return on the own capital (8)
The changes in this ratio usually affect the share price of the company on the exchanges.
5.the average operating ratio
(9) The average operating ratio shows the stability of the performance of the enterprise over a determined time period.
Abbreviations:
Пр - income from sales; V - sales volume per accounting period; А -assets (balance sheet total) as of the year end ; О к - main capital ; С к - own capital (per balance sheet) as of year end; Пб - profit; Пч - net profit.
Relative indexes describe the effectiveness of enterprises' performance. The ratio of sales volume to assets (V / Акт) and the ratio of sales volume to the main capital (V / Ок) shows, in first case, the effectiveness of use of all assets, and in the second case, the effectiveness of the use of the main capital.
The ratio of the sales volume to working capital (V / Акт.) - shows the degree of sales activity of the enterprise. .
The ratio of the sales to inventory (V / МПЗ) shows the turnover of inventory.
Methods of increasing the production capacity.
The overall indicators of the degree of employment of productional capacity are:
-capacity index as a ratio of the production plan (ПП) to the productional capacity (ПМ).
- The index - Index of the production load (К3) as a ratio of the labor intensity of the production plan (Т) to the scheduled time of usage of all equipment.
- Index of - Shift utilization index (Кс) as as ratio of labor intensity of the production plan (Т)to the scheduled time of equipment usage per one shift
- Integrated capacity utilization index (Ки) as a multiple of indexes of time and capacity of equipment utilization.
- Index of the proportionality of capacity, which is calculated as the production capacity of the production floor divided by the production capacity of the entire plant.
The main methods of the improving the use of the production capacity are technical, economical and organizational. Technical methods include innovation and investments, upgrading, expanding and optimization of the production. Economical methods include bonuses and sanctions provided to the management. Organizational methods include the improvement of the organization of the production, labor and management.
2.9. Main risk factors related to the activity of the company.
Industry risks
- Changes of domestic and international prices of the produced goods, which, in turn, is defined by the regional ratio of supply and demand. Price cycles of the various types of goods are formed in a different manner and strongly depend on the macroeconomic tendencies ;
• The increase of direct costs, transportation expenses and the cost of electricity;
• Tear and wear of the main production capacity and the need for modernization;
• Weather risks - unfavorable weather conditions (for example, warm winter) often lead to the increase of the lumber harvesting expenses, and therefore, the increase of raw material prices, shortage of the raw materials on the market;
• changes in the laws and tax code, and the increasing requirements in respect to protection of the natural environment.
To lower the industry risk, the main measures that should be taken by the enterprises of the forest industry should be as follows:
• upgrading the equipment and optimization of the production process, directed at the lowering of the production expenses and improving labor productivity. Introduction of the new production technologies;
• the expansion of product range and increased production of items with the high rate of recycling, improvement of the marketing strategies, optimization of logistics;
• closecollaboration with the local authorities.
Country and regional risks
The company is engaged in business activity only on the territory of the Russian Federation and is exposed to all the risks related to the potential changes of the political and economical situations of the country..
About ¼ of the the produced goods are exported to the countries of Western Europe.
The structure of domestic sales depends on the product type and is quite diversified by the territory. If the situation in a particular territory, where the company conducts business, will get worse, the enterprise will be able to adjust its geographical distribution structure.
The enterprise is located on the territory of the Leningradskiy region, an economically stable territory of the Russian Federation with the developed cluster of forest industry enterprises. The probability of natural catastophies leading to the interruption of transport lines of the region, where the production is located, is dramatically small.
Financial risks
Taking in the account the principal business activities of the enterprise, it is possible to say that its operations are fairly strongly exposed to the financial risks, related to the changes of the interest rates, and somewhat less to the changes of the exchange rates set by the Central Bank of Russian Federation. Approximately 60% of sales are conducted in foreign currency (euro), while practically all the expenses are incurred in rubles. Measures should be taken to mitigate the negative impact of potential decrease in exchange rates on the operating results of the company.
The changes in the interest rates could impact the cost of refinancing of the loan obligations of the company. The potential increase of overall interest rates on the Russian market could lead to the increase of the cost of financing the enterprise, which could have a negative impact on its financial conditions. Currently the company finances its operations primarily through short-term secured bank loans and through its own capital. There is a certain risk of refinancing a short-term obligations, i.e. the risk of attracting borrowed funds at a certain time period. This type of risk could present itself during the period of bank crisis or the crisis on the debt market. The possibility of exposure to the risk of refinancing is mitigated by the open credit lines in the branches of the largest banks of Russia.
In case of unfavorable changes of the exchange rates the company plans to increase the degree of correlation of assets and obligations, income and expenses according to the currencies and terms. In case of unfavorable change of the interest rates the enterprise is planning to take advantage of the refinancing and early repayment of the liability with the variable percentage rate. In any case the company is planning to implement a flexible approach to debt refinancing, choosing the most appropriate methods of refinancing depending on the particular market conditions.
Legal risks
The company conducts its business and is subject to the economic and legal laws of the Russian Federation. Therefore, the production and financial activities of the company to a certain extent depend on the changes of the applicable federal and regional laws and regulations.
The company operates within the laws of the Russian Federation, as well as environmental regulations, legislations over the environmental protection and use of the natural recourses, resolutions of the Ministry of the Natural Resources of the Russian Federation, etc.
Currently the risks of changes of the foreign currency control and regulation, and risks of changes in the rules of the customs and duties are quite high. Presently Russia is planning to increase the dues on exported lumber.
The company's ability to generate the financial inflows could be affected by the risk of changes in the federal and regional tax codes, and particularly, by the possible risk of increased tax payments, submitted by the company upon results of its business activity, which could lead to the increase of the costs, decrease of funds available for financing the current business activities and servicing its debt obligations.
It is presumed that the lack of consistency of the tax policy in respect to providing an economic incentives provided with a purpose of stimulating the investments into the industries of Russian Federation, will not have a significant impact on the financial and investment activities of the enterprise.
3. Practice part
3.1. The description of the company and its achievements.
The object of this diploma research is LLC «Konglomerant», located in the city of Primorsk, in Leningradskiy region.
The company has been working on the timber market more than 15 years.
Up to the first half of 2009 the company was focused exclusively on the international market - it was exporting the wood to Finland, to the city of Imatra. The main export was rough wood, beginning in 2008 - chipped wood. Transportation services were provided by the third party, the company registered in Finland.
Up to 2008 the position of the Executive Director was held by the outside person, in 2009 there occurred a change in management - the position of the Executive Director was assumed by the founder of the company.
The achievements of the company
- at the current conditions of decreased exports of timber, the company has arranged the production of chipped wood and the wood products ( trays);
- the company owns its modern harvesting machinery;
- it has a high potential of development and focus on the domestic market;
In 2008 a long-term contract for the delivery of сhip fuel has been signed with the company LLC «Russkiu les».
The main data of the delivered goods are provided in table №4.
Table №4. The main information about the delivered goods
Type of wood chips Humidity Quality of the wood chips Minimal volume Delivery volume Transport
Rind, heartwood soft and hard rot, sap rot and superficial sap rot.
No higher than 55 % Staining by stones, sand, metal and other foreign objects is not permitted 1500 m3 50 000 m3/month Transport provided by the customer
To analyze the operating results the let's review the structure and changes of the financial results provided in tables №5, №6, №7.
Table №5. Main information about profits and losses of the company.
NaCo Code Per accounting period, in thousands of rubles. For the similar period of the previous year, in thousands of rubles.
1 2 3 4
Revenues and expenses from operations Net revenues from the sales of goods, products, services (less VAT, excise tax and similar mandatory payments) 010 52436 87844
Cost of sold goods, works, services 020 41462 82326
Gross profit 029 10974 5518
Sales expenses 030 9071 2147
Management expenses 040 1228 1217
Profit (loss) from sales 050 675 2154
Other revenues and expenses
Other revenues 090 18970 13843
Other expenses 100 18343 13990
Profit(loss) before taxes 140 1302 2007
Net profit (loss) of the accounting period 190 1302 2007
Table №6. Main information regarding profit and losses of the company.
The ratio Per accounting period, in thousands of rubles..
For the similar period from the last year, in thousands of rubles

Name Code Income Loss Income Loss
1 2 3 4 5 6
Exchange rate differences, operations with the foreign currency 240 1771 365 104 131
Table №7.The accounting balance of the company. Actives
Active Code Beginning of the accounting year End of the accounting year
1 2 3 4
1. Fixed assets
Capital 120 7139 5271
Unfinished construction 130 119 381
Total in group 1 190 7258 5652
2.Working assets
Inventory 210 7556 4134
Raw materials and similar 211 132 118
Finished goods and goods for resale 214 6666 4016
Prepaid expenses 216 758 -
Value Added Tax 220 1 68
Accounts receivable (the payments that are expected to be received within the 12 months) 240 6074 6219
Including customers and clients 241 3824 4436
Monetary funds 260 2479 10268
The total of group 2 290 16110 20689
TOTAL 300 23368 2634
Table №8. The accounting balances of the company. Passive
Passive Code Beginning of the accounting year End of the accounting year
1 2 3 4
3. Capital and reserves
Registered capital 410 4 4
Retained earnings 470 2638 3806
Total per group 3 490 2642 3810
4.Long term obligations
Total per group 4 590 - -
5. Short-term obligations CC
Credits and loans 610 213 -
Accounts payable 620 20513 22532
including suppliers and contractors 621
18698 19221
the payments in arrears for the personnel 622 76 -
the payments in arrears to the government extra-budget funds 623 42 6
accrued taxes and dues 624 77 48
other creditors 625 1620 3257
Total per group 5 690 20726 22532
TOTAL 700 23368 26341
Statement of value charged on off-balance accounts
Rented fixed assets 910 8385 8385
Graph №1 Net profit
Diagram №2 Impact of factors on the changes of net profit.
3.2. The analysis of the current conditions of the firm.
The data in tables №7 and №6 shows that the total balance has increased by 12%. Most likely it is related to the changes in the capital of the company (disposal of assets), the value of which had decreased 26% during the accounting period, and also due to the 3422 thousand rubles in sales of finished products from the warehouse, and also due to the additional profit of 1406 thousand rubles from the favorable exchange rate operations.
This situation is mostly due to the volatility of exchange rates of the foreign currency during the past period of crisis, by the conversion of the monetary funds, received through the sales of main capital and finished goods, into the foreign currency.
This increase of the total balance cannot be an indirect sign of the expansion of the business activity of the enterprise, as Table №5 shows that there had been a significant 40% decrease in revenues, which also demonstrates the decrease of volume of sales.
Taking into the consideration the decrease in revenues and the decrease in the quantity of the finished goods, it can be indirectly suggested that the finished goods were sold at the undercharged prices. .
The turnover of assets has decreased by 47%, which suggests a significant decrease in the business activity.
The product cost has decreased 49% in the accounting period.
The profit from sales has decreased by 68 %, net profit by 35 %, profitability from sales has decreased by 47 %, which suggests that the firm is in the critical condition.
The net margin has increased by 8 %, which suggests that the measures have been taken during the crisis period, to increase the efficiency and to decrease the costs of the company.
Short-term debt obligations have increased by 8 %, which, considering the rate of revenue growth suggests a significant decline in the company's ability to make the payments.
Based on the facts above, it is obvious that the company needs to increase its ability to compete, and, most importantly, needs to find new distribution areas, particularly, on the Russian market. All the detailed recommendations will be provided below.
3.2. The company's ability to compete.
Currently the company is undergoing significant changes with the objective of increasing its competitive ability.
The most important measures of improving the financial conditions of the company are:
• to find the internal resources that would allow to increase the profitability and to reach the production without the losses due to the more efficient use of the production capacity.
• to increase the quality of the products,
• to lower the product cost,
• to use the material, labor and financial resources in a more efficient manner, to reduce unproductive expenses and losses
• to search for the new areas of distribution
One of the most effective methods is the introduction of wasteless technologies and the focus on the production of timber and paper products for the pulp-and-paper plants and the production of the wood products for the domestic market.
In my opinion, the forest industry of Russia is providing several competitive advantages to the companies, such as fairly inexpensive labor, gas and electricity, fast-growing consumption of the wood products.
This is why the strategical development of the forest industry companies requires government support of the product lines that would permit to compete on the international market.
Based on the description of the company it could be noted that it has the modern machinery for the wasteless production of the wood materials, as well as highly qualified personnel with other 10 years of experience, and own production areas and warehouses.
Currently, the production volume has decreased by 40%На (mostly due to the export of wood to Finland), and, in my opinion, the ability to compete on the domestic market must be developed. Also, the company must attract foreign investors, for example, from Sweden, since the negotiations regarding the delivery of chip fuel and wood products.
Also, as a method of increasing the competitive ability it is necessary to sign a contract with the company LLC «Russkiy les», regarding the long-term delivery of trays fro various types of wood.
3.3. The reduction of product costs analysis and recommendations.
The significance of the analysis of the product cost consists of the fact, that it provides one of the most important quantative indicators of the economical efficiency of the production, and only based on the throughout analysis it is possible to point out the underlying opportunities and define the strategies of increasing the end results with a minimum required input of labor, raw materials and financing. The analysis of the product costs allows to point out the tendencies of changes of this indicator, of completion the prior developed guidelines, point out the factors responsible for the increase of the costs and based on this, come up with the estimate of the performance of the enterprise, and find out the opportunities to lower the product costs.
What are the objectives of the product cost analysis? First, to define or estimate the amount of the expenses related to a particular type of product, services or daughter companies. Second, to help managing the product costs, to support the decisions, like setting the price, the product mix or the production technologies, by providing precise information about the product costs. Third, to analyze the costs, by researching the cost data, and to provide the conclusions of the research in a format that can be used for the managerial planning and as a support the short and long-term decisions.
The product cost analysis should, first of all, provide the necessary information to the managerial personnel of the enterprise, responsible for planning, operations control and making various administrative decisions.
The product cost analysis aims to find the opportunities in the production process that would allow to increase the effectiveness of using the material, labor and financial resources during the production, supply and sales cycles. This analysis provides the necessary information needed for the managerial purposes, for defining the indicators of effective performance, for making the strategical decisions regarding pricing, product mix, technological process, product development. Based on this analysis, the managers and specialists make tactical decisions and take actions.
One of the main conditions of receiving reliable information regarding the product cost - is a clear definition of the composition of production costs. In our country the structure of product costs is subject to government regulation. The main principles of the composition of the cost structure are defined in the Law of Russian Federation «About the tax on profits of enterprises and organizations» and further stipulated in the Regulation on the structure of costs. Moreover, based on this Regulation, ministries, government agencies, intersectoral state organizations, corporations develop industry regulations regarding the structure of product costs and recommendations regarding planning, accounting and calculation of the product cost (jobs, services) for the subordinate enterprises. The regulative role of the government on the subject of product cost is also reflected in the setting of standards of amortization of the main funds, rates of social security deductions, etc.
According to the Regulation on the structure of costs, the product cost (job, services) is the cumulative cost of the raw materials, fuel, energy, main funds, labor resources used in the production process, and other expenses related to the production and sales. The main goals of the product cost analysis are:
- to provide the objective assessment of the implementation of the product cost budgets and the changes when compared to the past accounting periods, as well as adherence to the actual laws, contractual and fiscal discipline;
- to investigate of reasons for variances between the budgeted and actual figures;
- to provide the necessary information to the cost control department for the purposes of prompt management of the product costs;
- to facilitate calculation of the optimal budget figures, budget and actual calculations for single items and product types;
- to find out and calculate the opportunities of lowering the expenses related to production and sales of goods.
The nature of these objectives provides an insight on the high practical significance of the analysis of the product costs for the business activities of the enterprise.
The analysis of the business activities is based on the system of indicators and supposes the use of a wide range of sources of financial information.
The main source of the information required to conduct the product costs analysis lies in the accounting data: information of the accounts (synthetic and analytical accounts, that reflect the spending of materials, labor and monetary funds, corresponding account books, journals, and, if necessary, the original documents), budgeting data (estimated, actual), information about the expenses related to the production and sales of goods and other items (jobs, services).
Recommendation №1
The company does not own the vehicles required for the transportation of the products. Previously the company had to hire Finnish carriers for the delivery (services were overpriced), therefore it needs to find a company that would provide transportation services.
The demand for carrier services (particularly for the transportation of timber) has fallen due to the crisis, therefore the prices had also fallen and the number of offers had increased.
In my opinion, this provides an opportunity to find a cost-efficient provider of services.
It is suggested to enter into the agreement with transport companies of St.Petersburg regarding the delivery of chip fuel, trays and wood products to the residences and pulp-and-paper plants. This would allow to decrease the transportation expenses by 5%. The decrease of expenses for per event is calculated according to the formula:
Э з. скл. = (Р тр. - Р тр.) х О мр. : 100, (2.8)
where Р тр. - is the share of the transportation expenses per materials type before and after the implementation;
О мр. - the volume of the implementation, in thousands of rubles
The data for the calculation is provided in Table
Table № 8. - The data for the calculation of savings generated by the reduction of transportation expenses
Name of the construction items The volume of implementation, in thousands of rubles The amount of reduction of transportation expenses, in %
Prior to the implementation After the implementation
Wood products 1016,0756 25 20
Chip fuel 977,8036 25 20
TOTAL: 1993,8792
The savings on the transportation expenses: Э т. з. скл. = 1993,8792 х (25-20) : 100 = 9969,396 тыс. руб.
The company has its own modern logging machinery, forwarder and harvester. The analysis of the product costs per production unit is shown in tables 9 and 10.
The analysis of the product costs of the stem method of harvesting is shown in table 11.
Table №9. The information for the calculation of the product costs per production unit for the harvester (the exchange rate is €= 44 rub.)
Harvester Timberjack 1270D
Total operation time for the calendar year 269 days
Total working time during the calendar year 2 867 hours
The degree of usage of the machinery 80%
Cumulative effective time 2294 hours
Breaks and interruptions 430 hours
Travel time 143 hours
Purchase price 12 mil of rub
Useful life( 15 000 hours) 6,5 years
Amortization deductions 25%
Hourly productivity 15 m3/hour
Trade-in percentage 15.2 %
Interest rate on the bank credit 15%
Fixed costs Rub/year Rub/hr
Interest payments 1036800,00 451,96
Wear and tear 1565538,00 682,45
Managerial expenses 51435,00 22,42
Other 62888,00 27,41
Total fixed costs 2716661,00 1184,24
Variable costs
Rub/year Rub/hr
Oil and lubricant expenses 365943 159,52
Maintenance and repair expenses 171450 74,74
Spare parts 514350 224,22
Wages of the operator 306758 133,72
Social security deductions 35,6 %
Deductions for medical insurance 3,9 %
Other 1029 0,45
Total variable costs 1480699 645,47
Insurance 0
Entrepreneurial risk 5 %
Total cost
4407228 1921,2
Total cost pe 1 hr/ m3 128,08 rub.
Table №10. The information for the calculation of the product costs per production unit for the forwarder (the exchange rate is €= 44 rub.)
Forwarder Timberjack 1010D
Total operation time for the calendar year 269 days
Total working time during the calendar year 2 867 hours
The degree of usage of the machinery 85%
Cumulative effective time 2437 hours
Breaks and interruptions 287
Travel time 143 hours
Purchase price 6.35 mil rub
Useful life(15 000 hrs) 6,9 years
Amortization deductions 22%
Hourly productivity 15 m3/hr
Trade-in percentage 17.5 %
Interest rate on the bank credit 15%
Fixed costs Rub/year Rub/hr
Interest expenses 559594,00 229,62
Wear and tear 759239,00 311,55
Managerial expenses 51435,00 21,11
Other 62888,00 25,81
Total of fixed costs 1433156,00 588,09
Variable costs
Rub/year Rub/hr
Oil and lubricant expenses 317148 130,14

Maintenance and repair expenses 514350 211,06
(spare parts)
Wages of the operator 323698 132,83
Social security deductions 35,6 %
Deductions for medical insurance 3,9 %
Other 2160 0,89
Total variable costs
1285217 527,39
Insurance 0
Entrepreneurial risk 5 %
Total costs
2854292 1171,25
Total cost per 1 hr/ m3
78,08 rub.
Table № 11. The information for the calculation of the product costs per production unit for the stem method of harvesting.
ТDТ-55А
Total operation time for the calendar year 269 days
Total working time during the calendar year 2 867 hours
The degree of usage of the machinery 70%
Cumulative effective time 2007 hours
Breaks and interruptions 717hours
Purchase price 891700 rub.
Useful life ( 7525 hours) 3,5 years
Amortization deductions 25%
Hourly productivity 8 m3/hr
Trade-in percentage 26.5 %
Interest rate on the bank credit 15%
Fixed costs Rub/year Rub/hr
Interest expenses 84600,00 42,15
Wear and tear 187257,00 93,30
Managerial expenses 51435,00 25,63
Other 62888,00 31,33
Total fixed costs 386180,00 192,41
Variable costs Rub/year Rub/hr
Oil and lubricant expenses 180125 89,75
Maintenance and repair expenses 120426 60
(spare parts)
Wages of the operator 177245 88,31
Social security deductions 35,6 %
Deductions for medical insurance 3,9 %
Others 1543 0,77
Total variable costs
549351 273,71
Insurance 0
Entrepreneurial risk 3 %
Total costs
963597 480,1To
Total cost per 1 hr/ m3 60,01 rub
The analysis provided in tables 9, 10 и 11 shows that stem harvesting method has the smallest expenses, but it also has some disadvantages, such as low productivity and quality of the materials, low efficiency, short useful life, and the fact that wasteless production is impossible due to which the company utilizes the sorting method. Growing stock and soil sometimes get damaged during the process of utilizing the tree-length method. -the completely automated sortment machinery leaves only about 5% of the damaged trees, and the majority of the damaged trees (93%) are within 5m from the borders of the logway, while the share of the damaged trees increases dramatically when the stem harvesting method is used. The quality of the raw materials is higher when the sorting method is used. There are almost no mechanical damages, deep tears and chips on the tree trunks.
For example, while the team of the lumbermen equipped with the logging vehicle harvests 7-8 thousand of cubic meters of timber per year, the harvester and forwarder - more than 50 thousand cubic meters.
Therefore, if the enterprise converts to the fully automated method of harvesting, the productivity is increased, while the required number of personnel decreases, thus providing the solution to the reduction of personnel issue.
Recommendation №2
The profit from sales has decreased by 68 %, net profit has decreased by 35 %, profitability has decreased by 47 % , which suggests that the company needs to find new distribution areas.
I suggest that the company organizes the production of semi finished and subsequently signs an agreement with LLC "Russkiy les", a company that is interested in long term purchasing of the large volumes of semi finished trays from various types of wood ( pine, aspen, birch, alder, poplar) with the delivery until St.Petersburg.
Sizes (mm): 22*143*800, 1200; 22*98*1200; 17*75*1200; 17*78*1200; 17*98*1200; 14*60*1200. Class: 1,2,3. Allowed - bluestrain up to 10%, blunt back from one side no larger than 5%. Not allowed - rot, mildew, fungi, falling knots. Humidity - normal. Packaging per GOST 19041-85.
The payment shall be processed per bill of lading. Fulfillment of export and domestic contracts.
Principal information and economic indicators of the production of semi finished trays.
1. Characteristics of the processed materials:
Brood - pine, fir tree, birch, aspen, alder, etc.
Hydraulic condition - from dry to drivable or frozen.
Type of the processed material - low quality, undersize or shortsize timber (industrial and fuel wood, topwood, undersized from the cleaning cutting), wastewood from the plywood production - core, wastewood from the lumbering -- half-timber, sawn wood. The length - 800 - 7000mm; Diameter - 70 - 280mm; Half timber - of any size; sawn wood - thickness up to 150mm.
2. Productivity of materials per shift - up to 30 m3
3. Output of finished product (square-sawn timber):
- without the processing of the half beam part - 27-30;
-with the processing of the half beam part - 40-43.
4. Quality - according to the European guidelines.
Economical indicators of the effectiveness of the tray production, with the processing depth of 30%.
Product cost of 1m3 of eurotrays.
1. Cost of raw materials 3,3 m3. х 2 USD = 6,6 USD
2. Transportation cost to the production floor 3,3 m3. х 1 USD. = 3,3USD
3. Wages of the workers (processing of raw materials and manufacturing of eurotrays) 3,3 m3. х 2,8 USD. = 9,24 USD
4. Wages of AUL 3750 rub. : 247 m3 = 15 rub. 18 kop. = 0,6 USD
5. Usage of electricity 21,44 KV / hr. х 0,036USD . = 0,77USD.
6. Amortization of equipment 35,000 USD. : 36 month. : 247m3. = 3,93 USD.
7. Packaging of eurotrays per 1 m3 = 1,12 USD
8.- Security of the plant per 1 m3 . = 1,29 USD
9. Telephone, utilities per 1m3 = 1,24 USD.
10. Total product cost of 1 m3 of eurotrays = 28,09 USD дол.
11. The price of 1 m3 of eurotrays upon loading to the truck at Vyazma is 65 USD.
12. The delivery of eurotrays by truck from Primorsk to the port of St.Petersburg is 5 USD per 1 m3
13. The export price of eurotrays at the St.Petersburg market is 70 USD.
14. The income from production and sale of eurotrays per 1 m3 is 36.91 USD
15. Monthly production schedule of eurotrays is 247 m3
16. Monthly export sales of eurotrays amounts to 17 920 USD
17. Monthly taxable profit is 9 116.8 USD
Recommendation №3
In order to utilize the entire volume of harvested timber, including the rotten ones, lumber waste,sawmill and wood processing waste, it is advised to set up a charring section (charring production). There are two options of organizing this type of production: mobile (at the cutting area) or stationary (the lower part of the warehouse, production floor).
It should be noted that the processing of timber waste, sawmill and wood processing waste yields the charcoal of the lower qualities, compared to the processing of the whole lumber. However, in this case, the main priority is not the size of financial impact (although it is also important), but the solution to one of the most important environmental issue - the liquidation of waste of the forestery (wood cutting) activities of the enterprise.
The most promissing use of the wooden charcoal is its utilization as a raw material for the production of the activated carbon.
The demand for the charcoal on the markets of Moscow and St.Petersburg, especially during the summer, significantly exceeds the supply of the producers located in these regions. .
Moreover, the delivery from other regions, traditionally specializing in producing of the carcoal (Bashkiriya; Kirovskaya, Sverdlovskaya, Nizhegorodskaya, Vologodskaya regions) are not profitable due to the increase in fuel prices and the costs of railroad transportation.
According to the data of the research companies the demand on charcoil on the domestic market is 50 thousand tons per year, on the international - 40 thousand tons per year.
The capasity of the St.Petersburg's market is 100-120 ton per month, mostly to meed the domestic needs and food catering needs.
To set up the production of the charcoal it is recommended to use the oven PUM-6, which are produced as mobile and stationary.
The operation process consists of: preparation of the lot, preparation of the wood, loading the oven, ignition, placement of the chimneys, regulation of drying and pyrolysis processes, unloading and cooling of the coals.
The average volume of charcoal produced by one oven during one cycle is 550kg, which is produced from 6.5 m3 of the wood.
The yearly output of one oven is 70 tons.
Leasing option can be possibly provided by the manufacturer upon signing a certain contract. .
The financial calculations provided below (tables 12, 13) show that the charcoal production is profitable.
The cost of producing 1 ton of charcoal will be significantly lower due to the minimization of raw materials expenses if the timber, that was harvested using own resources, was used.
The use of dead fallen wood as the raw material would somewhat reduce the output, (no more than 30), but the product costs will decrease significantly.
The product costs will also be lower when using the wood made as a result of the intermediatory use (cleaning cutting, environmental harvesting), due to the absense of the amount of forest tax from the total product costs.
The optimal organization of labor on the charcol producing lot, the optimization of loading and ignition of the ovens (cycling), cross-training of the personnel, hourly schedule of the delivery of the materials, etc. - allows to optimize the costs even furthe
Table № 12. Investments.
N п/п Name Quantity Amount, in thousands of rub.
.
1 Oven PUM-6 4 600
2 Knee-type crane 1 20
3 Chain saw MP-5 "Ural" 3 10
4 Wood splitting machine KC-7 1 70
Total direct costs 8 700
5 Transportation (distance of 500 km) 10
6 Installation works 15
7 Unforseen expenses 10 49
Total expenses 774
Table № 13. Main economic indicators of the charcoal production (months).
N п/п Name Units of measurement Amount
1 Raw materials (the cost of 1m of log length, in the warehouse ) thous. rub 0,23

The required amount of raw materials per month m3 336
Cost of the raw materials thousand of rub. 77,3
2 Operational personnel pple 7
The number of the operational personnel, including:
- the labor men - preparing the raw materials, loading, unloading, packaging -"- 4
- operators of PUM-6 -"- 2
-AUP -"- 1
Monthly wages fund, total thousand of rub 30,8
- labor men -"- 25,2
AUP -"- 5,6
3 Electricity
Electricity expenses (0,55 rub. kVt/h) thousand of rub 1,02
wood splitting machine -"- 0,73
- lighting -"- 0,29
4 Spare parts, oil and lubricants
Oil and lubricants for the chain saw
"Ural" thousands of rubles 1,6
Spare parts for the chain saw -"- 0,5
5 Materials
Sacks of kraft (1941 . х 4 r. 50 kop.) thousands of rubles 8,7
6 Transport expenses
Delivery to St.P (distance of 250 km) thousands of rubles 10,8
7 Total expenses thousands of rubles 130,7
8 Monthly production volume Ton 31,8
10 Product cost thousand of rub/ton 4,1
11 Sales price -"- 7
13 Monthly income (23,3х6,00) thousands of rubles 222,6
14 Monthly profit thousands of rubles 91,9
15 Tax rate on the profit 30
16 Amortization period year 4
17 Amortization deductions thousands of rubles. 11,2
18 Net profit thousands of rubles 64,3
19 Cash inflow thousands of rubles 75,5
20 Break-even calculation months 10,2
Recommation №4
Implementation of the waste-free technologies by the enterprises of the forest industry is another measure related to the processing of the lumber harvesting waste.
The equipment for the production of the fuel bricks can be installed., for example , «Kompakt-600».
The lumber harvesting waste (kerf waste, slabwood, wood chips) can be used as raw materials for the production of the fuel bricks. This way, this equipment, using only the waste products, will produce the fuel bricks and at the same time will eliminate the waste products of wood processing, without the employing the additional funds (except for servicing the equipment).
It must be taken in consideration that in Sweden in the past several months the small-sized wood, that has traditionally been a raw material, used by the pulp-and-paper plants, is sold to the biofuel plants.
Under the conditions of falling demand and prices of the pulp wood, and the steady growth of the consumption of the energy wood has increased the competition for the small-sized lumber, and the volume of wood chips and roundwood, used for the production of the energy resources, is expected the increase, therefore there is a possibility of the decrease of the supply of the materials for the pulp-and-paper plants.
The increase of demand on the forest biomass, including branches, blocks, and the tree-tops, will lead to the more intensie use of the wood materials not only in Sweden, but also in other european countries. This is an opportunity for the company to get an access to the international markets.
Recommendation №5
The above recommendations were targeting the expantion of the product mix and distribution channels, because the business activity of the company has decreased significantly.
The analysis of the company from the accounting point of view has generated the following suggestions:
- to lower the product cost by decreasing the labor expenses (possible switch to the piecework wages system, by the volume of completed works
to conduct the rotation or personnel, combine job duties, stop hiring the foreigh employees in favor of the domestic specialists(currently the enterpise employs several persons from the Russia's neighbouring countries, and two people from Finland, due to the fact that the foreigh workforce has a high cost, has high taxes and payments for using the foreign workforce
adjust the labor time depending on the demand
review and optimize the fixed costs
the improve of the effective work time of the equipment by decreasing the planned downtime, liquidaation of unplanned downtime of the equipment.
This is reached through the optimized organization of repairs and technical services, following the technological guidelines, uninterrupted materials supply, high professionalism of the labor workers, modern organization of labor.
- more intensive use of the equipment per the unit of time.
the renewal of the technical base of the production by renting the main funds, leasing of the equipment and machinery. If they were received according to the rental or leasing contract, there is an option of purchase by making the installment payments in case of absence or shortage of the capital for renewal of the main production funds.
Conclusion
In this diploma work we have studied the potential measures (recommendations) regarding the decreasing of the product costs, as well as the issue of maintaining enterprises' ability to compete, because, according to the accounting records of the company, the profit from sales has decreased by 68%, net profit - by 35%, profitability - by 47% during the accounting period due to the decrease of the demand on timber on the international market. The company is not able to lower the export price of the timber, the only other option - is to develop the domestic market. The actuality of the topic is also of a practical nature: in the nearest future the company must find new distribution areas, expand the product mix, otherwise it could loose its ability to compete and attract profitable investments. In my opinion, the company has the growth potential, and it must be understood that the decrease of costs for the account of lowering the wages and reduction of the labor time, switch to the piecework payment system - are the necessary measures in the conditions of the crisis.
The main opportunities of decreasing the cost consist of the following: implementation of the developments of the technological process; improvements of management, labor and production optimization; rational use of the materials.

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